PepsiCo beats expectations but soda struggles

PepsiCo's profit beats analysts' estimates on stronger sales, lower tax rate

Associated Press

NEW YORK (AP) -- PepsiCo is selling more its snacks and drinks around the world but the maker of Frito-Lay, Gatorade and Quaker Oats is still trying to figure out how to sell more soda in the United States.

The Purchase, N.Y.-based company on Thursday reported a first-quarter profit that beat Wall Street expectations as it saw strong growth in emerging markets such as China and India and benefited from a lower tax rate.

Its snacks business in North America also saw healthy growth, with Doritos and Lay's helping lift revenue by 4 percent. PepsiCo, which is the world's biggest salty snack maker, noted that premium products such as Stacy's pita chips and Sabra hummus are seeing particularly strong growth.

For its beverage business in the Americas, however, revenue was even as price hikes offset a decline in volume.

"The cola category continues to be a challenge," CEO Indra Nooyi noted in a conference call with investors.

Over the past year, PepsiCo significantly stepped up marketing for its namesake drink, including an endorsement deal with the pop star Beyonce. But Americans are continuing to cut back on soda in favor of water, sports drinks and bottled teas.

PepsiCo offers a variety of drinks in all those categories, including Tropicana juice, Mountain Dew and Aquafina. But Nooyi noted that the company has to be careful about investing more heavily in one brand at the expense of another. Soda, for example, is generally more profitable than bottled waters.

"Any growth we achieve in one area takes from another area where we compete," Nooyi said.

With growth sluggish in the U.S., PepsiCo and rival Coca-Cola Co. have both been working to improve margins by reducing costs wherever they can. Earlier this week, for example, Coca-Cola announced preliminary deals to start refranchising its U.S. business. By handing over distribution rights to its independent bottlers, the Atlanta company would lower its own expenses in favor of franchising fees.

PepsiCo also is reviewing a restructuring of its North American beverage business, including the possibilities of refranchising. But the company doesn't plan on providing an update on the effort until early next year.

Despite its better-than-expected results, PepsiCo stood by its forecast that core profit would grow 7 percent for the full year, following a year in which it slashed costs and spent more on marketing its biggest brands.

For the three months ended March 23, PepsiCo Inc. earned $1.08 billion, or 69 cents per share. That's down from $1.13 billion, or 71 cents per share, a year earlier.

Excluding the impact of Venezuela's currency devaluation and other items, it earned 77 cents per share. Analysts expected 70 cents, according to FactSet.

Revenue rose 1 percent to $12.58 billion, beating analysts' prediction of $12.54 billion.

When adjusting for the impact of refranchising its business in China and foreign currency exchange rates, the company said revenue rose 4.4 percent.

A lower core effective tax rate also boosted results. But the company said it expects the rate to climb for the remainder of the year.

Shares were up $1.15, or 1.5 percent, at $80.

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AP Business Writer Michelle Chapman contributed to this report.

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